Crude Rises With Possible EU Ban On Oil From Iran

U.S. oil futures inched higher Wednesday, but still reached their highest level since May 10 as traders remain anxious about continued tensions between Iran and the West.

Those worries were best demonstrated mid-morning when crude prices jumped over a dollar to $103.74 in six minutes on a report that European Union leaders agreed in principle to an embargo on Iranian oil imports. However, those prices receded due to the lack of a concrete timeline or precise parameters of the ban.

The apparent deal between EU leaders is the latest escalation in a conflict between Iran and the West that began in early November when an International Atomic Energy Agency accused Iran of taking steps to develop nuclear weapons. Iran contends its nuclear program is only for peaceful purposes.

Since then, Western nations including the U.S., the U.K. and France have supported sanctions targeting Iran's energy and financial sectors, and Iran has responded with a series of threats about closing the Strait of Hormuz, a key passageway for one-third of the world's ocean-borne oil. President Barack Obama signed a measure Dec. 31 sanctioning financial institutions that deal with Iran's central bank.

EU diplomats told Dow Jones there has been a "political deal in principle" among the member nations to support an Iranian oil embargo, though differences remained over the timing. Also, there was still no agreement on what form the sanctions would take.

"There's still a lot of details that need to be released on the EU decision," said Tom Bentz, director of BNP Paribas Prime Brokerage. "The markets are just kind of absorbing the information."

Light, sweet crude for February delivery settled up 26 cents, or 0.3%, at $103.22 a barrel on the New York Mercantile Exchange. Prices for Brent crude on the ICE Futures Europe exchange settled to near two-month highs, up $1.57, or 1.4%, at $113.70 a barrel.

Traders said the prospect of an embargo was already priced in to oil's recent surge from around $95 a barrel, and that the lack of specifics gave little reason to drive higher.

Iran exports 2.2 million barrels of oil per day, according to the U.S. Energy Information Administration, of which 600,000 go to the European Union. Though the global oil portfolio is currently balanced, there is little headroom between supply and demand, and analysts fear the removal of some or all of Iranian barrels would set off a worldwide scramble to replace them, with few easy options.

Oil's up-and-down day also exhibited close correlation to equity markets, which were buoyed by encouraging data on growing factory orders and auto sales but weighed down by renewed worries over euro-zone solvency. The Dow Jones Industrial Average was down early in the day on news that Spain was weighing an application for emergency loans and European banks were parking record amounts of cash at the central bank rather than offering overnight inter-bank loans. But it rose later in the day after the release of the domestic data, up 20 points to 12,417.

Front-month February reformulated gasoline blendstock, or RBOB, settled up 3.66 cents, or 1.3%, at $2.7852 a gallon. February heating oil settled up 5.17 cents, or 1.7%, at $3.0899 a gallon.